George Osborne says people who have worked and saved hard all their lives should be trusted with their own finances. Photograph: Alamy

Pensioners will soon be free to do what they like with their retirement savings after the chancellor promised to scrap compulsory annuities in a bombshell for the pensions industry. The move almost immediately wiped £5bn off the value of shares in the firms that provide annuities – and provoked fears of a fresh buy-to-let boom as pension pots are used to buy property as a retirement income.

In the most far-reaching overhaul of pensions since 1921, George Osborne said: "Let me be clear: No one will have to buy an annuity … People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances."

Every year about 420,000 people buy annuities worth £14bn – which convert a person's pension savings into an income for the rest of their life – but falling interest rates and rising longevity have sent payouts to historic lows. Annuities are often cited as the most hated financial product in Britain, condemned not just as poor value but because they die with the pensioner and do not form part of their estate.

Osborne unveiled a series of reforms that come into force on 27 March, abolishing several technical rules that will mean pensioners can take more of their savings as cash immediately. He also promised by April next year to remove all remaining tax restrictions on access to pension pots. "Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any time they want. No caps. No drawdown limits."

The existing ability for pensioners to take 25% of their pension pot tax-free at the point of retirement will remain, but the tax rate on drawdown of the remaining cash will be slashed from 55% to 20% for most.

The changes – described as "the final nail in the coffin for annuities" by one financial adviser – prompted a rout in the share price of the main providers. Worst hit was the specialist annuity provider Partnership Assurance, which only floated on the London Stock Exchange (LSE) last June at a valuation of £1.8bn. Its shares fell 55% soon after the news, changing hands at 143p, compared with 450p on its first day of trading.

The major insurance companies – Legal & General, Aviva, Prudential, Standard Life and Resolution – saw share prices tumble by up to 13%. L&G, which has £34bn in annuity assets, admitted the changes would have "far-reaching consequences" but tried to calm fears in a statement to the stock exchange rushed out after the announcement. Skandia, an insurance firm, said a quarter of annuity sales could disappear immediately as a result of a change in the rules for "trivial" pension pots that comes into immediate effect.

Before the budget only those with less than £2,000 in a pension could take it as cash, but the limit is to rise to £10,000 for any individual pot, and £30,000 for people who have saved in a variety of different schemes. From next year the limits are expected to be scrapped altogether.

Previous chancellors have resisted popular calls to abandon compulsory annuitisation because of the "moral hazard" of savers blowing their cash on cars and holidays, then falling back on welfare. The National Association of Pension Funds said: "People often underestimate how long they will live and overestimate how long their pot will last. There is a recognised problem with the lack of financial literacy in the UK."

Osborne promised extra help for anyone retiring who needs financial advice. "We're going to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have. I am providing £20m over the next two years to work with consumer groups and industry to develop this new right to advice."

Savers who have built up substantial pots are likely to dump annuity purchase in favour of investing in property for an income in retirement, said Savills. "Given the performance of buy-to-let properties in many markets, this could become an attractive option for those with larger pension funds," said Neal Hudson, a residential property analyst, while Mark Giddens, an accountant, said the changes would result in "a huge boost to buy-to-let".

Campaigners for first-time buyers said the reforms, combined with a further extension in the Help to Buy scheme, could make house prices surge again. Duncan Stott, of Pricedout.org, said: "It is a strong cause for concern that the chancellor may be unleashing extra buy-to-let demand into the housing market and driving up house prices.

"With house prices already out of the reach of 3.5 million workers, the prospect of even more buy-to-let investors out-competing people from a home of their own will worry those who are fed up renting in the UK's broken housing market."

The decision to scrap compulsory annuitisation follows similar moves in the US, Australia and Denmark and a damning report by the Financial Conduct Authority in February that condemned many annuities as poor value. The FCA said its findings painted a picture of a "disorderly market" and said there were still significant barriers stopping people shopping around.

But many financial advisers warned that retirees should not write off annuities. Martin Bamford, of IFA Informed Choice, said: "Annuities are still a very effective way of insuring against living too long. If you simply draw from your pension fund, there is a big risk you will run out of money before you die. Annuities prevent this from happening. They have been under scrutiny in recent years due to such low interest rates, but despite the pension reforms announced in the budget today, I still believe annuities will remain a popular and mainstream retirement income choice for the majority of people reaching retirement age."